7 essential provisions for every employment contract
Monday, March 12, 2018
Written employment agreements can be used for executives, sales professionals or in other special situations. This article highlights seven provisions usually covered in such agreements. Obviously, an agreement should be tailored to individual circumstances and may contain provisions not mentioned here.
1. Description of duties
An agreement should identify the employee's title and contain either a reference to a job description or an outline of the employee’s duties. In addition, the agreement should require the employee to put forth best efforts on behalf of the employer, focus all of the employee’s time, energy and effort on the employer’s interests during working hours, and refrain from engaging in conduct that could damage or conflict with the employer’s business.
A description of job duties should include the place where the employee will work and whether travel is required. The agreement should specify from whom the employee will take direction and to whom will the employee report.
2. Compensation and benefits
An agreement should contain the terms of the employee’s compensation. The agreement should indicate the amount and at what intervals the employee will be paid and how and when the employee’s salary may be adjusted. The agreement should also state whether the employee will be considered exempt or nonexempt.
If applicable, the agreement should clarify requirements for commissions, such as when a commission is earned, how and when a commission is paid, whether and the terms on the employee will receive a draw against commissions and the effect of employment termination on eligibility for commissions.
An agreement should address incentive programs, bonuses or similar arrangements. If the employer pays a bonus, the agreement should indicate whether the bonus is discretionary and who makes the decision. If there are criteria for a bonus, those criteria should be identified along with how the criteria are met, who determines that the criteria have been met, and when the bonus is earned and paid. The agreement should also indicate what happens to eligibility for any incentives if employment terminates.
An agreement should indicate whether the employee is reimbursed for business expenses and that the employee is expected to comply with the employer’s reimbursement requirements. The agreement should address whether the employee is provided phone, meal, travel or other expenses.
An agreement should address benefits for which the employee may be eligible during the term of employment, such as medical, dental, vision, life, disability, professional liability or other insurance. References to such benefits should state that the benefits are subject to terms and conditions of the applicable plan or policy.
If the employer will reimburse the employee for professional fees, memberships or educational training courses, the agreement should cover those items.
The agreement should address the employee’s eligibility for other benefits such as paid vacation, holidays and sick leave. An agreement may not necessarily specify those exact benefits and some agreements simply state that the employee will be eligible for the same benefits as similarly situated employees (or as set forth in the employee handbook). Any eligibility for stock options, profit-sharing plans or pension plans should be identified in the agreement, with references to any implementing agreements.
3. Restrictive covenants
One major reason employers offer employees written agreements is to get the employee’s commitment to certain restrictive covenants. The typical restrictive covenants limit the employee’s competition with the employer, solicitation of the employer’s customers or employees, and disclosure of the employer’s confidential information or trade secrets during the term of employment and for some period of time thereafter.
Generally, restrictive covenants should be reasonably related to and necessary for protection of the employer’s legitimate business interests and the covenants be reasonable in geographic scope, time and the nature of the activities prohibited. Laws governing restrictive covenants vary by state laws and employers should consult legal counsel to insure that such provisions are valid, enforceable and up-to-date.
An agreement should either state that the employment relationship is "at will" or under what circumstances employment contract can be terminated. It should specify who can terminate the employment contract and whether the employee is to receive any form of compensation upon termination.
Typical grounds for termination in an agreement can include the employee’s death or disability, the employee’s voluntary resignation or resignation for "good reason" and the employer’s right to terminate the agreement for "no cause" or "cause."
With respect to "no cause" termination by the employer, the agreement should allow the employer to relieve the employee of duties and responsibilities immediately, even though the employer may be required to pay the employee for a set period of time following notice that the employer is exercising its right to terminate the agreement for "no cause."
"For cause" termination is not defined by any particular law and should be defined in the agreement. "For cause" generally requires some misconduct or poor performance by the employee to justify termination.
An agreement should include a list of specific actions by the employee that include, among other things, fraud, misrepresentation, theft or dishonesty; arrests, criminal convictions or the entering of a plea of "guilty" or "nolo contendere" to any crime; violation of company policies and procedures such as those prohibiting drug or alcohol abuse or harassment; and any act or omission that results in a breach by the employee of the employment agreement. Some contracts may include a "notice and cure" provision whereby the employee can be terminated for poor performance so long as the employer provides the employee specific notice of the performance deficiency and a time to “cure” the problem.
An agreement may allow the employee to resign for "good reason" — which is treated differently than a voluntary resignation. Situations where an employee has "good reason" to resign may include where there is a change in the employee’s duties, authority or responsibilities, control of the employer’s business, the employee’s reporting relationship or where the employee is required to work.
The agreement should specify what compensation is due to the employee upon each different type of termination covered by the agreement. Most agreements provide that if an employee voluntarily resigns, is terminated "for cause" or dies, the employee will receive only that compensation which has been earned up to and including the date of termination.
However, if the employer terminates the agreement without cause or if the employee resigns for "good reason," the employee will receive some form of separation pay and possibly continued benefits paid for by the employer, in addition to any the compensation and benefits which the employee earned up to the date of termination.
If the employer plans to set performance goals or other metrics of success for the employee, the agreement should reserve to the employer the right to set or change such goals, when and how they will be established. In some cases, it may be appropriate to specify the goals in the agreement or to reference a schedule or attachment to the agreement.
6. Dispute resolution
Many agreements limit disputes to a particular venue or jurisdiction and require that the law of a particular jurisdiction governs the agreement.
Some agreements also include provisions for dispute resolution outside of the traditional judicial system, such as mediation or arbitration. Arbitration may be preferable to some employers because it is a private adjudication system and fact decisions are ultimately made by an experienced individual rather than a jury. Employment arbitration may not be significantly less expensive and the arbitrator’s decision is subject to limited review.
7. Term of the agreement
An employment agreement should set forth the term of the agreement. It may be for a fixed term, such as one or two years. With a fixed term, the parties should indicate what notice of termination is required and when and what happens at the end of the term.
The agreement should state whether the agreement will simply end or whether the agreement will continue automatically if neither party provides notice to the other that there will be no extension of the contract.
Employment agreements can be valuable tools for defining the relationship between an employer and its key employees. Although the content of an agreement may vary widely, this article identifies seven key terms that should be addressed by most agreements.
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